The Difference Between Term and Permanent Life Insurance

If you are not familiar with life insurance, it is protection from an unforeseen loss of life. Life insurance is an important part of any financial plan. Protect your family and your legacy by insuring your own life. I think many people agree that life insurance is something you should have, but do they know what the difference is between the available types of life insurance?

How does life insurance work?

Life insurance is a contract between an insurable interest and an insurance company. The contract takes on the financial risk of the premature death of the insured. In exchange for coverage (known as a death benefit) and a potential cash value account, the insurable interest pays a premium. Coverage is given to the insurable interest based on their health, age, and whatever other specific underwriting requirements the insurance company has. If the insured passes away, the insurance company must pay the death benefit – so long as the insured complied with the underwriting and had paid their premiums.

What is Term Life Insurance?

When you are talking about term life insurance, think temporary or for a term of time. Term policies are often used to get people a large amount of coverage for a specific time. Once the term is over, the policy closes. This is unless the insured has the ability to renew or convert some portion of the policy to permanent insurance.

Benefits of Term

  • Low cost (usually significantly lower than permanent)
  • Usually renewable
  • Can provide a large death benefit
  • Can sometimes be converted to whole life insurance

Cons of Term

  • It eventually expires and will disappear if not used
  • There is no cash value associated with the account
  • Will sometimes go up in price annually

What is Permanent Life Insurance?

Permanent life insurance covers you for the remainder of your life. It doesn’t expire in the way that term life insurance can. Most of these policies also carry a savings portion to them. This savings portion is known as cash value and the insurable interest has access to this cash or can borrow against it. These policies have favorable tax treatment. You will not have to pay taxes on the cash value, even if you withdraw from the policy in the form of a loan. You can also withdraw cash from the account up to the amount you paid in premiums tax-free.

Benefits of permanent insurance

  • Death benefit doesn’t expire
  • Tax benefits
  • Cash value

Cons of permanent insurance

  • Usually expensive (in comparison to term)
  • May not be able to get all the death benefit you need

Bottom Line

The main difference between term and permanent life insurance is that term is made to protect you for a specific term of time where you’re seeking a lot of coverage. For example, you may look into term life insurance plans if you have children and would like them to have the same life if something were to happen to you. Permanent insurance is good for providing benefits you will always need, such as final expenses, debts you may carry, and potential tax burdens from estate taxes. A great component of many permanent policies is the included cash value that you can use while still alive.

Everyone should include life insurance as an essential part of a financial plan. A person must protect themselves and their asses before they begin to invest in the long term properly. Remember, you don’t have to choose one policy over the other – sometimes a combination of both policies can get you the coverage you need with the benefits you want. For more information on life insurance, check out the book “Money. Wealth. Life Insurance.: How the Wealthy Use Life Insurance as a Tax-Free Personal Bank to Supercharge Their Savings” by Jake Thompson